Do You Think Shareholder Activism Works

Topics: Stock market, Corporate governance, Investment Pages: 6 (1896 words) Published: August 26, 2012

Shareholder Activism refers to a range of actions taken by a shareholder to influence corporate management and board. Actions range from threatening the sale of shares (“exit”), letter writing, meetings management, to asking questions at shareholders meetings and the use of corporate voting rights. The common definition of a shareholder activist is a shareholder “who tries to change the status quo through the “voice”, without changing control of the firm. Shareholder activism in the United States dates back to the 1930’s, when Henry Ford cancelled a special dividend, so as to spend money on social objectives. For the first time in the history of corporate America, shareholders objected and took the matter to the court. The court did not side with the firm’s management, but made way for its shareholders to receive their special dividend. In the 1980’s, shareholder activism took a more aggressive approach with corporate raiders like Paul Getty. Shareholders took on management by engaging in hostile takeovers and leveraged-buyouts to gain control of undervalued and underperforming companies. In the 1990’s shareholder activism found mainstream pension fund managers like the California Public Employees’ Retirement Scheme, pushing for the repeal of staggered boards and poison pills. These fund managers used a form of “quiet” activism – favouring abstentions and withholding votes for important proxy issues – as a way to influence management and board decisions. In recent years, shareholder activism has once again changed, with the hedge funds emerging as leading the most aggressive activism campaigns. In corporate America, shareholder activism is greatly hindered by a complexity of legal rules and regulatory systems. According to US federal and state laws, the only way a shareholder can force a firm’s existing managers to pursue alternative strategies or changes in corporate governance, is through a contested proxy fight, which is very costly. Often, the mere threat of a proxy solicitation is enough to persuade the incumbent management to make the changes requested. In contrast, Black and Coffee (1994) argue that the UK provides an ideal institutional setting for shareholder activism, with a more supportive legal framework than the United States. Under Companies Act 2006, shareholders have legal powers that enable them to have greater influence over the board than their US counterparts. In the former, shareholders have the right to remove a director, bring derivative action on company’s behalf against a director and demand a general meeting whereas in the US these may be realized by way of a proxy fight. Recent corporate scandals have resulted in corporate financial distress, e.g. Enron, WorldCom and in significant loss of wealth to shareholders. Shareholders lobby for more protection and corporate monitoring. Activists advocate corporate changes in relation to: (a) corporate strategy, often seeking to unlock value through improved returns on capital; (b) improved business performance through board changes; (d) addressing management issues, including remuneration and board composition, (e) influencing corporate events such mergers and acquisitions. Proponents claim that shareholder activism increases firm value by shaping corporate policy and promoting specific actions, such as rescinding poison pills. Management consequently are more focused on improving shareholder value. All shareholders have a right to vote at general meetings on matters that are of concern. The combined code states that “institutional shareholders have a responsibility to make considered use of their votes.” Thus, although most activist proposals may not win, because a minority cannot secure a majority vote, it still attracts attention to the issue and builds support for it. An activist proposal can complement a broader campaign to gain control of a corporation or to exert pressure for...

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